Editor’s Note: Real estate in California is starting to get frothy. The same is true in New York. Ditto for Washington, D.C. Agents and investors nationwide interviewed by the Foreclosure News Report are starting to get edgy about the fast-rising prices in some higher-end markets. Experts tell us that prices are rising too fast and incomes are declining. Add to this mix rising interest rates and you have a recipe for a potential housing crash, some warned. Here’s an excerpt from the October 2013 Foreclosure News Report.

Housing affordability is fading rapidly for hundreds of thousands of homebuyers in some of the nation’s pricier metros — as three important measurable real estate variables — home prices, mortgage interest rates and household income — collide to form a perfect storm drowning out affordability. Tight inventory, pent-up demand and investor activity, both domestic and foreign, are driving more and more buyers to the sidelines.

In a certain costly metros — including Los Angeles, New York, San Francisco and Washington, D.C. — prices are appreciating at rates not seen since 2000, when the housing bubble was being inflated by the subprime-driven housing expansion.

Now, as then, homebuyers — longing for the American Dream — are increasingly thwarted by rising prices, multiple offers, the fear of rising interest rates and a virtual housing run, creating frenzied demand by institutional cash buyers that has pushed prices to double-digit annual gains in some of the nation’s most expensive housing markets.

As demand rises and supply shrinks, cities around the country are experiencing a residential rebound. Nowhere is this more evident than in California’s three major coastal cities — San Diego, Los Angeles and San Francisco.

Allison Marklein, an agent with RE/MAX Associates in San Diego, said there’s a supply-demand imbalance driving prices higher in San Diego, where the median price was $417,500 in July.

“What we see happening in San Diego is that investors are snapping up distressed properties for cash,” said Marklein. “Sellers started to notice the rapid price appreciation and decided to wait to sell since prices are spiking so rapidly. That has further dampened the supply channel. Over the past three to four months the frenzied market pace has slackened. It could be due to the sharp rise in mortgage interest rates and home price increases over the past 24 months. Although it pushed some on-the-fence buyers into the market it also may have priced out others who could barely afford San Diego’s high-priced real estate.”

Marklein said she noticed another interesting trend that surfaced last year.

“Initially, FHA-backed loans are for first-time buyers,” said Marklein, noting a rise in Federal Housing Administration buyers. “The percent of buyers using FHA-backed loans has increased. It used to be about 20 percent of the buyers. Now, it’s doubled, and 40 percent of buyers are using FHA financing.”

Only 36 percent of Californians could afford a single family home at the state’s median price of $415,770 in the second quarter of 2013, down 44 percent in the first quarter, according the California Association of Realtors (CAR) housing affordability index. Rising home prices in costal markets and the Bay Area made buying a home unaffordable for a majority of California’s population.

You can read the full article on housing affordable by requesting a FREE issue of Foreclosure News Report by clicking here.

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